• Friday, May 24, 2024
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BusinessDay

Why you should have a retirement saving account

Nigerian workers and retirement woes

You’ve dedicated years of hard work and sacrifice to building a career. Now, retirement beckons, promising a time of relaxation and well-deserved enjoyment. But what if financial worries cast a shadow on your golden years? This is where a Retirement Savings Account (RSA) becomes your ultimate retirement companion.

Nigeria’s social security system offers little support, which won’t be enough to maintain your desired lifestyle after retirement. An RSA acts as a bridge, ensuring you have a steady income stream to cover your living expenses comfortably. One of the primary benefits of joining the Contributory Pension Scheme (CPS) is the opportunity to save for retirement in a structured and disciplined manner. Under the scheme, both employees and employers are required to make contributions to the RSA of the employee. These contributions serve as a form of mandatory savings, ensuring that individuals set aside funds for their retirement years.

By starting to save for retirement early and consistently contributing to your retirement savings account, you can take advantage of the power of compounded growth (annual interest). Compound interest allows your savings to grow exponentially over time, as your earnings generate additional earnings. The earlier you start saving, the more time your money has to grow, increasing the potential value of your retirement nest egg.

The cost of living in Nigeria, including expenses such as housing, healthcare, and daily essentials, continues to rise. Without adequate savings, retirees may struggle to cover their expenses and maintain their standard of living in retirement. By contributing to a retirement savings account, individuals can build a financial cushion to offset the impact of inflation and rising living costs.

In Nigeria’s dynamic job market, employment opportunities and income levels can fluctuate over time. Having a retirement savings account provides a sense of financial security, allowing individuals to accumulate savings regardless of their employment status or career changes. This financial resilience can help mitigate the impact of job loss or unexpected financial challenges.

Retirement savings held in the RSA enjoy legal protection against creditors and bankruptcy proceedings. This means that individuals’ retirement savings are safeguarded from potential financial liabilities or legal claims. It provides peace of mind knowing that retirement funds are secure and preserved for their intended purpose of providing income in retirement.

Pension Fund Administrators (PFAs) managing RSAs offer a range of investment options to suit the risk tolerance and preferences of contributors. These options may include equities, fixed income securities, real estate, and alternative investments. PFAs place a strong emphasis on risk management to protect contributors’ retirement savings from market volatility and downside risks. Fund managers conduct thorough risk assessments and implement risk mitigation strategies to safeguard the pension fund’s assets. Diversification, asset allocation, and periodic portfolio rebalancing are some of the risk management techniques employed to ensure the stability and resilience of the investment portfolio.

PFAs are required to provide regular updates and reports to contributors on the performance of their retirement savings investments. Contributors receive statements detailing their RSA balances, contributions, investment returns, and portfolio allocation. This transparency allows contributors to track the growth of their retirement savings and make informed decisions about their investment options. The CPS is regulated by the National Pension Commission (PenCom), which oversees the activities of pension operations and ensures compliance with regulatory guidelines. PenCom establishes investment regulations and guidelines to govern the investment activities of PFAs, ensuring that contributors’ funds are prudently managed and invested in accordance with best practices and industry standards.

Contributions made to the RSA enjoy tax advantages under the CPS. Both employee and employer contributions are tax-deductible, meaning they reduce the individual’s taxable income. Additionally, investment earnings within the RSA are tax-deferred, allowing savings to compound over time without immediate tax implications. These tax benefits enhance the long-term growth potential of retirement savings.

A retirement savings account can also serve as a means of legacy planning, allowing individuals to leave a financial inheritance for their loved ones. By accumulating wealth in a retirement savings account, individuals can provide for their beneficiaries and ensure their financial security beyond their lifetime.